Author Archives: Moheb Hanna

Daily Recap – Stop Loss Choices

When trading the financial markets, all traders must bear in mind what is called risk management. Financial market traders can get their accounts wiped out and lose their equity fast if they don’t adhere to the rules. Risk management rules include stop loss and take profit prices, as well as other capital preservation methods. Today we will focus on one of the most important, which is the stop loss.

Stop loss orders vary and can be based on different factors, not necessarily just the price. Stop loss orders are placed to protect accounts and open positions in case the market reverses against the trader and the positions incur a huge loss. So how to determine the best stop loss level for any specific trade? To place a stop loss traders must bear in mind several factors and then make a decision as to which stop loss is the most appropriate for this specific trade. These factors include technical levels, volatility, support and resistance levels, time frame, as well as the characteristics of the currency pair traded itself. Some different types of stop losses are:

1- Equity Stop
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One of the ways to determine a stop loss price is the equity stop where a trader would decide to risk a certain amount of money or a percentage of his/her account on a specific trade. If the trade loses and the account falls below the specified level then the trade is closed and the loss is realized.

2 – Technical Stop
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This is one of the most commonly used stop loss levels. Traders analyze the market technically and give a thorough look to support and resistance levels previously created in the market, whether caused by consolidation or a Fibonacci level, then place their stop loss orders around this level, bearing in mind the volatility of the traded pair.

3 – Volatility stop
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Traders keep an eye also on the Volatility Index (VIX) to determine if the market conditions require an exit strategy to protect the account, such as on days when there is fear in the market, and thus violent price action.

4 – Event Stop loss
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If a trader has a plan that is based on a certain scenario an unexpected event could take place which could have an influence on the trade. In this scenario, traders would decide the stop loss based on the specific event circumstance.

Stop losses are a method to protect traders’ accounts and almost always, it’s better to be stopped out from a trade rather than losing the entire account equity and fighting the market. As goes the famous trading golden rule, it’s better to stay alive and live to fight another day.

The charts and examples found on this website are educational examples and are not intended to be representations of profits or losses that can be achieved through forex trading. When reviewing any such examples, please keep in mind that past results are not necessarily indicative of future results.

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Daily Recap – Market Forces: Supply and Demand

The currency market is the most liquid market in the world, with around 4.5 trillion dollars traded every day, which is more than the whole world’s GDP for one month. If we look at this market from a distance we see how difficult it can be to try and work out what market forces drive price movements and what causes a specific currency pair to move from one price level to another, only to see a few hours later the price go back to where it was as if nothing has happened.

We can say that the main factor influencing the price of a specific currency pair is the supply and demand. Every second of the day there is an entity or an individual changing currency somewhere in the world and different currency pairs continually change hands based on the supply and demand for the currency. The currency market players are central banks, financial institutions, banks, corporate hedgers and business involved in international trade. An example of a business changing currency on a regular basis would be companies involved in international trading whether, its export or import. Think Toyota paying attention to the relative value of the dollar versus the yen when they sell huge amounts of cars in America. This type of company would change currencies regularly, and in some cases might not wait for a good price if they have to convert the currency at a certain time for business purposes which cannot wait till the exchange rate is more favorable to them. Another example would be travel agencies paying one another invoices across the globe. On an even smaller scale, this about travelers and tourists who are always changing currencies for daily expenses. Also, we should never forget ourselves, the currency speculators – who buy or sell based on our expectations of future price.

All market participants play a collective role everyday in price determination for different currency pairs. The main factor that is derived from all these daily transactions is supply and demand. Sometimes bad economic news or economic data released from a certain country can arise and a temporary move in the market price could take place caused by speculators. If the bad news leads to expectations of price decrease, the market will be flooded with excess supply from speculators selling, and increased supply leads to decreased price. Once the news effect is over market forces of supply and demand would rule the currency market again and the price movements will be influenced by that.

For an example of a news release that affects the market and then fades away, we can look at the EUR/USD chart of yesterday, September 19th, 2011. Around 6PM EST news was released that Standard and Poor’s had downgraded Italy by a notch and kept its outlook as negative. Immediately the EUR/USD pair slipped around 70 points. Several hours later, during the following trading session, the pair made up for the losses incurred on the previous day and market forces prevailed. Supply and demand at its simplest.

The charts and examples found on this website are educational examples and are not intended to be representations of profits or losses that can be achieved through forex trading. When reviewing any such examples, please keep in mind that past results are not necessarily indicative of future results.

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Daily Recap – Fibonacci Retracement levels

The EUR/USD is the most widely traded pair among all available currency pairs. It represents 50% of all currency trading volume worldwide. Traders focus on the EUR/USD even if they are trading other pairs because it influences the entire market. This pair is also known to follow technical set ups and traders can anticipate the market direction using technical analysis with a higher chance of getting it correct, as opposed to using technical analysis for trading illiquid currency pairs or pairs which are controlled by central banks for the protection of their own currency such as the Yen and the Swiss Franc, and we all saw what happened with the CHF last week when the Swiss National Bank intervened.

We discussed in a previous post how two tops formed on the EUR/USD daily chart and also looked at a descending triangle chart pattern which formed on the same chart about a week later. Both patterns showed bearish direction which took place and materialized on Friday September 9th, 2011.

Now traders are looking at the market and trying to anticipate the market direction for the EUR/USD and based on their anticipation, positions will be established. There will be traders who think that the EUR/USD has made a big move to the downside and expect it to rebound back up, and there will be other traders who will look more closely and consider the debt issue in Europe and think that it is far from over and therefore they will anticipate an even further decline for the pair.

I want to draw your attention to a widely used tool in trading forex, Fibonacci retracement levels. Usually when the market makes a big move in any direction, there is a retracement for this move. This retracement could be interpreted into different outcomes but the most popular explanation is that these levels represent profit taking levels as well as traders on the other side of the trade for whatever reason. As for the technical analysis for Fibonacci’s, simply there are different price levels which the market is expected to retrace to these levels influenced by different conditions. Traders will use the different levels to enter or exit the market based on their expectation. The most difficult part in calculating Fibonacci retracement levels is setting up the levels. Once that is done correctly, you have a much better chance of finding a profitable trade.

On the attached chart we see that the EUR/USD pair has dropped from 1.4550, which is the high of the swing high down to 1.3501. The market the retraced back up to the first Fibonacci price level of 1.3738.

To read more about Fibonacci levels, please follow the link below:

http://www.cmsfx.com/en/forex-education/technical-analysis-articles/volatility-indicators/fibonacci-levels/

To read the article for the tops and descending triangles on the EUR/USD, please follow the link below:

http://www.cmsfx.com/blog/author/mhanna/

The charts and examples found on this website are educational examples and are not intended to be representations of profits or losses that can be achieved through forex trading. When reviewing any such examples, please keep in mind that past results are not necessarily indicative of future results.

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Daily Recap – Triangle Chart Patterns

Trading the financial markets is a complicated process for traders. It’s rarely easy to anticipate market moves, otherwise we would all be rich by now. Traders constantly look for tools that assist them in making decisions and anticipating market direction for a specific currency pair or a financial instrument. Since financial markets have existed, there have been many dramatic changes which have affected the plight of the speculator, including the advent traceable instruments, as well as huge advancements in different types of analysis and reporting. One factor however has remained somewhat constant, and that is human nature and behavior. Traders now and traders 100 years ago share almost the same human nature and investors’ attitude towards certain market events haven’t changed over time. Due to this constant, certain observable formations on price charts can reflect investors’ attitudes towards a certain event, regardless of whether it occurred today or a 100 years ago.

Chart pattern recognition is one of the most favorable tools for traders because it’s considered a leading indicator, meaning it leads future price action and traders are able to plan based on the pattern they see on the chart, as opposed to react. By looking at a simple line chart, traders can identify a pattern during its formation or once its completed and apply trade details based on the pattern. Traders can choose a entry prices and specify stop and limit orders for profit taking and stop loss. We must always remember though, that two traders can be looking at the same chart and each of them can view a pattern differently. Many factors play into this such as experience.

There are many different types of chart patterns; some are not that common, but some of them are widely used and every trader must know about them. Widely relied upon patterns include head and shoulders, wedges, flags, triangles, tops, and bottoms.

Triangles reflect consolidation which presumably leads to trend continuation. As you may well know, there is more than one type of triangle that traders can see forming: symmetrical, ascending and descending triangles are the most common. Today we picked a descending triangle pattern as an example. We recognized a triangle pattern still in the formation process on the EUR/USD daily chart. A descending triangle is characterized by a relatively flat support line and decreasing downward sloping resistance line. This formation potentially reflects consolidation during a downward trend and is sometimes interpreted by chartists to be an indication of continuation. An ascending triangle potentially tells the opposite story.

We can see a formation of a descending triangle on the EUR/USD daily chart. There is a line of support around the 1.4000 level for the EUR/USD which represents the horizontal flat side of the triangle. Traders can plan their entry price, stop order and limit for profit taking using the pattern and its borders.

To view examples, images and read more about triangles, please follow this educational link from our web site:

http://www.cmsfx.com/en/forex-education/online-forex-course/chapter-3-technical-tools/technical-analysis/triangles-wedges/

The charts and examples found on this website are educational examples and are not intended to be representations of profits or losses that can be achieved through forex trading. When reviewing any such examples, please keep in mind that past results are not necessarily indicative of future results.

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Daily Recap – Market Gaps

Market gaps happen often in financial markets, sometimes during the market trading hours and sometimes during a weekend or long vacation when the market is closed. Gaps are simply sharp price moves from one level to another without trading at each different price tick in between, leaving a blank space on the chart where price action is interpreted. Some traders, if not the majority, try to anticipate the type of gap and the reason that it happened. This is for the sake of trying to make a profit based on analyzing the gap move in the market. Gaps can happen on any time frame chart and the longer the time frame, the more significance this gap might have.

Gaps can occur based on fundamental or technical reasons. From a fundamental perspective, for example, a report or an announcement during market opening or closing hours which caused a big market move can create a gap. It could also be caused by a technical reason, such as a formation of a clear chart pattern which could push the price quickly to a different level creating a gap.

There are different types of gaps and the hard part is to decide which type a gap is. If a trader anticipates the gap cause correctly, then he/she can make a decision which could be profitable. To be able to decide gap types, it takes some trading experience, and errors are always possible. As mentioned before, technical analysis is an art of probabilities and nothing is ever guaranteed. A trader must understand the gap type and the reasons behind it. Let’s look below at different gap types:

- Breakaway Gaps.

These are the gaps that occur at the end of a certain price action or pattern and could signal a change in underlying trend.

- Exhaustion Gaps

This type of gap occurs after the market finishes a trend. They most often occur on weekends, when traders who still believe the existing trend is in place come in at market open hours to try to position themselves at the first moments of market open. Usually the price will reverse and the market will move against the gap.

- Common Gaps

Common gaps are the gaps that happen during trading hours or off market hours without a clear reason. It is simply a change in price which could be resulting from several factors. In traders language, they would say the market gapped up or gapped down.

- Continuation Gaps

This type of gap usually occurs during trading hours and within a price pattern or price action. It means that there was a rush of buyers or sellers coming into the market at same time which caused the price to move and gap up or down.

A rule of thumb which we must bear in mind is that most gaps usually get filled within the same trading day that they initially occur. There are some exceptions though. For example, if it’s a breakaway gap, it doesn’t make sense that the price will go back to the same level where it gapped, but it will tend to fill the gap, even if it just touches the price level where the gap is before traders quickly take the price back to where it should be.

The VT Trader chart below shows the GBP/CHF daily chart, with a major price gap which occurred several days ago.

The charts and examples found on this website are educational examples and are not intended to be representations of profits or losses that can be achieved through forex trading. When reviewing any such examples, please keep in mind that past results are not necessarily indicative of future results.

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Daily Recap – Heikin-Ashi Candlestick Chart

Chart patterns are one of the most relied upon ways to anticipate a market move, whether it’s in currency, commodity, equity or bond markets. Most traders use the Japanese candlestick charts because it offers traders the vision they are looking for, but today we want to focus on the Heikin-Ashi candlestick chart.

Most traders are familiar with traditional Japanese candlesticks. They are the green and red, or black and white bars you normally see on the default setting of a chart, and they show visually the open, high, low, and closing prices for any given period of time. If you aren’t familiar with candlesticks, for more information check out our candlestick education section.

Heikin-Ashi candle charts are a way to view the market with less volatility than what’s really happening and this is because of the way it is formulated. if we look at the formulas used to create the Heikin-Ashi charts we will see that it’s totally different than the standard candlestick charts.

Close price = (Open+High+Low+Close)/4

Open price = (Open(Previous Bar) + Close(Previous Bar))/2

High price = Max(High, Open, Close)

Low price = Min(Low, Open, Close)

Based on the above formula we can expect to see a candle stick where volatility of price action has less of an effect. The same chart patterns that traders look for and try to apply on the standard Japanese candlestick charts also apply to the Heikin-Ashi chart. If we look at the attached charts and compare the same candle on both types we can see that the Heikin-Ashi offers a view that absorbs part of the excess volatility leaving the pattern more clear to the viewer.

We have attached an example of a head and shoulder pattern that has formed on the NZD/USD daily chart. We have been looking at this pattern formation for a while. Today’s candle changed the pattern slightly on the traditional Japanese candlestick chart, however on the Heikin-Ashi chart the pattern still looks the same. A good example of using an alternative chart type to cancel out some of the noise in the market.

The charts and examples found on this website are educational examples and are not intended to be representations of profits or losses that can be achieved through forex trading. When reviewing any such examples, please keep in mind that past results are not necessarily indicative of future results.

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Daily Recap – Line and Candlestick Patterns

Trading the financial markets is a challenging career. Traders are required to follow strict rules in order to have a chance to survive. This includes risk management, controlling personal emotions, and a firm understanding of technical analysis.

It is a popular notion that candle sticks charts are one of the best chart views, showing in depth details. This is true to a certain extent, as they show traders more details than other chart types such as line or point and figure charts. Candlesticks show open, close, high and low prices for the day, in nice colors, which provides a visual representation of price action.

Most traders tend to ignore line charts, although they are the most basic chart type to use in the financial markets. The line chart offers a better view for longer term price action, with less details as it is created by connecting the close price only for the specified period to form a line. Line charts offer to traders the price action over a period of time eliminating volatility seen on other chart types which in some cases could influence a trader’s decision; what could be called reacting to the noise.

Looking at a line chart could be better if a trader wants to view longer time frame in the market without taking volatility in consideration. The opposite is true for a trader who is looking for short term trading, or in other words scalping.

We wanted to show an example of how the market view can confirm or differ by looking at different chart types. On the candle stick chart we can see a downward channel which indicates a downtrend for the EUR/USD. When we look at the line chart, we can see a descending triangle forming which indicates a possible breakout to the downside also.

Technical analysis is the art of identifying possible trend reversals and anticipating price action technically, hence traders would use the chart patterns to identify and decide on their entry price as well as stop orders and Limit orders to take profit which assists with the main rule in trading forex that trumps all other rules – risk management.

The charts and examples found on this website are educational examples and are not intended to be representations of profits or losses that can be achieved through forex trading. When reviewing any such examples, please keep in mind that past results are not necessarily indicative of future results.

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Daily Recap – Bernanke Speaks

Today was a memorable trading day as many investors gained back part of the equity they lost because of the S&P credit rating downgrade. Yesterday the Dow Jones plunged more than 500 points and regained today about 200 points of yesterday’s loss. This has been caused in part by a lack of confidence among investors that the global economy is growing. We saw in the currency markets extreme volatility as traders were positioning themselves since yesterday prior to Bernanke’s speech today. We saw the AUD/USD breaking parity with the US Dollar last night then returning back today to the same level where it was after Bernanke’s speech, and same happened for the NZD/USD and crude oil.

The AUD/USD is the closest pair to the stock market in terms of price action correlation, as the Australian dollar is considered one of the riskier currency assets. As for the New Zealand dollar it was also affected because the New Zealand economy is dependent on copper prices which only picks up when there is growth. The same holds true for crude oil, where consumption increases when there is growth because of more demand for energy to fulfill production needs.

We can ask ourselves, did the Fed really say anything that is significant to offer investors hope or was it just a pain killer!! The Fed mentioned that they will keep interest rates at the current low levels till mid 2013. The stock markets love low rates and this means that there will be no expected increase in value for the US dollar, which many traders were hoping for if the Fed were to raise or hint at raising interest rates before 2011 ends.

As we mentioned before, technical analysis plays a major role when it comes to difficult times like these. Technical analysis is the art of identifying a trend reversal at a relatively early stage. We must bear in mind that technical analysis deals with probabilities but never certainties. Therefore on a day like today and especially at this current time, no fundamental trader can anticipate the next move for most currency pairs and traders are left with two options, either sit in cash and have no open positions or rely on technical analysis to make a decision. Some traders depend fully on technical analysis and the beauty of TA is that it can answer many questions which fundamental traders would be given different answers for. Technical analysis can help traders specify levels for stop losses or limits, which make a difference when it comes to risk management.

We looked before at a pattern on the EUR/USD daily chart which showed about 4 tops, where every time the top was lower than the previous one. Today we are watching the pattern formation and we can see that there could be a formation of a fifth top. We could be proven wrong if the pattern is broken and the new daily candle crosses the previous highs or at least the latest high of 1.4507. The price level of 1.4500 is a very strong resistance level which the EUR/USD recently tried to break several times over the past 30 days but was unable to do so.

After reviewing all the above and analyzing today’s Fed statement while looking at our charts, we can still expect technical traders to continue following the pattern on the EUR/USD daily chart and anticipate a down move for EUR/USD to one of the comfortable price levels such as 1.4250 or 1.4150. You can check the support and resistance levels by using the support and resistance levels indicator on VT Trader. (Shown on the chart below)

The charts and examples found on this website are educational examples and are not intended to be representations of profits or losses that can be achieved through forex trading. When reviewing any such examples, please keep in mind that past results are not necessarily indicative of future results.

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Daily Recap – Payoff Day for Position Traders

Many traders have been following the EUR/USD during the past few weeks and traders had to deal with extraordinary volatility. This volatility led to losses for many of them, but decent profits for those who held on and stuck to their plan. The EUR/USD pair represents about 50% of the currency pairs traded in the retail forex market, and throughout the past few weeks the eurozone economy was under intense pressure from defaulting nations. At the same time, the US economy was under pressure because of the debt ceiling vote. In addition to these two major issues there was also the usual economic figures released daily, some better, some worse than expected. All this action has caused a lot of movement.

If we look at the EUR/USD daily chart we can easily see a formation of 4 tops, and each successive top failed to reach the previous high, in other words the pair made a lower high every time. By looking at this pattern some technical traders anticipated a major drop in the EUR/USD based on the technical view of the market. Technical traders would draw the same conclusion even if they observed a double or a triple top, but this was a quad top.

There will continue to be indecision in the market as the debt issue is digested, but supply and demand will be the major catalyst for the coming move which may continue lower for the pair as different patterns are emerging now.

The charts and examples found on this website are educational examples and are not intended to be representations of profits or losses that can be achieved through forex trading. When reviewing any such examples, please keep in mind that past results are not necessarily indicative of future results.

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Daily Recap – Dollar Stays Strong After US Session

As Michael pointed out yesterday, the dollar has been strong during the US session in recent days, and more bearish during the European and Asian sessions. However, for the first time in a while, perhaps as a result of his jinx, the greenback was able to hold throughout the Asian session today, and then continued to gain almost 100 pips in a little more than an hour during the European session. Why?

One major sign point to dollar weakness, and that is the continued failure to resolve the issue of the debt ceiling. Yet despite this, we are seeing dollar strength? This must mean things in Europe are even worse than they are stateside, and indeed, this is the case. While the debt ceiling crisis is a real one, the general assumption is that a resolution will be reached. It may not be satisfying for one party, or the other, or both, from a political point of view, but ultimately the strife and turmoil is temporary. The most likely outcome is that the issue is resolved, or at least the “can is kicked down the road” as we continue to hear. In Europe on the other hand, the issues being faced are of a more long term nature.

The very fabric of the European Union is in question, with the differences in political and economic culture between the member states highlighted currently more than usual. How long will German taxpayers continue to support their free-spending PIIGS neighbors? Price action over the past 2 days, with the euro dropping from a high of 1.4540 to a low of 1.4248 sheds some light on the question.

On the fundamental analysis front, there was good news for the US dollar today as well. First, at 8:30am EST the Department of Labor released their weekly unemployment claims result, representing the number of individuals who have filed for unemployment benefits for the first time last week. Expected to come out at 413,000 with some analysts expecting a worse that projected report, we were greeted by some positive news when the actual figure came out at 398,000, just a tad below the significant 400k mark for the first time since April. Good news indeed.

An hour and a half later the National Association of Realtors released their Pending Home Sales report, which represents a change in the number of homes under contract to be sold. Last month there was surprisingly positive news of an increase of 8.2%, but this month expectations were for a small contraction, down 1.5%. Instead, we received good news when the change came out positive, by 2.4%. The dollar gained a bit immediately on the release of these two reports, but gave back a bit throughout the day as talk continued to swirl of Boehner’s problems in unifying his rowdy party.

Shortly the house will vote on Boehner’s debt ceiling bill, and the outcome, as well as reaction from Harry Reid and his merry band of senators and the POTUS himself may prove to be interesting.

The big play tomorrow will continue to be the push and pull of debt concerns in the US and the eurozone, but if you are sick of this news, keep your eye out for the Canadian GDP announcement at 8:30AM EST tomorrow. Projected at 0.1% growth, any figure just a few tenths of a percentage up or down may have a major psychological impact, and could cause some steep and tradeable swings in the markets.

 

The charts and examples found on this website are educational examples and are not intended to be representations of profits or losses that can be achieved through forex trading. When reviewing any such examples, please keep in mind that past results are not necessarily indicative of future results.

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